BOE Keeps Rate at Record Low as Osborne Raises Forecasts

Photographer: Simon Dawson/Bloomberg

Carney said last month that a recovery has “finally taken hold” in the U.K., where the economy grew 0.8 percent in the third quarter. Close

Carney said last month that a recovery has “finally taken hold” in the U.K., where the... Read More

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Photographer: Simon Dawson/Bloomberg

Carney said last month that a recovery has “finally taken hold” in the U.K., where the economy grew 0.8 percent in the third quarter.

The Bank of England held its key interest rate at a record low in line with its forward guidance, as Chancellor of the Exchequer George Osborne said the economy is strengthening.

The Monetary Policy Committee led by Governor Mark Carney kept its benchmark rate at 0.5 percent, according to a statement in London today. The decision, forecast by all 48 economists in a Bloomberg News survey, comes a week after officials removed some incentives to mortgage lending, warding off a potential risk to financial stability that could have voided guidance.

Carney linked the future path of borrowing costs to unemployment in August to give households and businesses certainty on low interest rates and has said he won’t undermine the recovery by tightening policy too soon. Osborne said today that while the Office for Budget Responsibility raised its forecasts, growth is “not as strong as we would like.”

The MPC “seem united in the fundamental belief that inflation pressures will remain subdued as the economy recovers,” said Jonathan Loynes, an economist at Capital Economics Ltd. in London. “Interest rates should be on hold for a prolonged period” and the decision “should have been both straightforward and unanimous.”

The BOE left its bond-purchase program unchanged at 375 billion pounds ($613 billion).

The pound stayed lower against the dollar after the decisions were announced, and traded at $1.6337 as of 12:46 p.m. London time, down 0.3 percent from yesterday.

ECB Decision

The European Central Bank kept its key interest rate at 0.25 percent today, as forecast by all 60 economists in a Bloomberg survey. President Mario Draghi will hold a news conference in Frankfurt at 2:30 p.m.

Carney said last month that a recovery has “finally taken hold” in the U.K., where the economy grew 0.8 percent in the third quarter.

Reports this week indicated the recovery is maintaining momentum. Indexes of services, manufacturing and construction published by Markit Economics showed continued growth in November and point to expansion of about 1 percent this quarter.

New Forecasts

“Britain’s economic plan is working,” Osborne told lawmakers today as he presented his so-called Autumn Statement to Parliament. “But the job is not done. We need to secure the economy for the long term.”

Osborne said the OBR revised its growth projections for 2013 to 1.4 percent from 0.6 percent, and for 2014 to 2.4 percent from 1.8 percent. He said the U.K. is growing faster than any other major economy, highlighting the risks to Britain from weakness in its trading partners.

Under its guidance policy, the MPC has said it won’t raise its benchmark rate until unemployment, currently at 7.6 percent, falls to 7 percent. The pledge is subject to three clauses linked to inflation and financial stability.

The BOE’s Financial Policy Committee took action last month to prevent a housing bubble by tightening capital requirements on mortgage lending and adjusting its Funding for Lending Scheme to exclude stimulus for home loans. By tackling risks now, “authorities are reducing the likelihood that larger interventions will be needed later,” Carney said on Nov. 28.

Targeted Action

“It’s precisely because the authorities can act in this targeted and pre-emptive way -- and because our public finances are under control -- that the bank can keep overall interest rates lower for longer and support the rest of the economy,” Osborne said.

In forecasts last month based on no change to the benchmark rate, the MPC said the strength of growth suggested their unemployment threshold would be hit at the end of 2014. Still, policy makers said in the minutes of their November meeting that a record-low rate may be needed even after that point.

“There were uncertainties over the durability of the recovery,” the MPC said in the minutes, published on Nov. 20. The record of today’s decision will be published Dec. 18.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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